Dividend Stock Analysis – CRR

So with the recent market declines, a lot of us dividend growth investors are getting interested in buying some stock. An especially interesting sector right now is energy. Recently, the price for a barrel of oil dropped from a high of $107.73 to a low of $79.78 (as of today). As a result, companies in the energy sector are getting hammered. Even industry stalwarts like ExxonMobil (XOM) and Chevron (CVX) are well off their recent highs. Naturally, I’ll be analyzing the big boys in time, but I wanted to veer off the beaten path to see if there are other interesting values out there. I’ve found a smaller company involved in manufacturing ceramics for use in fracking, which I don’t think many of you have heard of.

That company is CARBO Ceramics Inc (NYSE:CRR).

Quick Background:

Quoting from Scottrade:

CARBO Ceramics Inc. is a supplier of ceramic proppant and resin-coated sand. The Company is a provider of fracture simulation software, and a provider of fracture design and consulting services, and a range of technologies for spill prevention, containment and countermeasures. The Company sells its products and services to operators of oil and natural gas wells, and to oilfield service companies. The Company’s products and services are primarily used in the hydraulic fracturing of natural gas and oil wells. The Company primarily manufactures five ceramic proppants. CARBOHSP and CARBOPROP are proppants designed primarily for use in deep oil and gas wells. It also sells fracture simulation software and provides fracture design, engineering and consulting services to oil and natural gas companies worldwide through its wholly owned subsidiary, StrataGen, Inc. [edited for grammar]

The company’s main competitors include Schlumberger NV (SLB), Halliburton (HAL), and National Oilwell Varco (NOV). Other direct yet minor competitors include U.S. Silica (SLCA) and Hi-Crush Partners LP (HCLP).

For more basic information, check out the company’s website and the 2013 annual report.

Fun fact: An investment of $10,000 in December 2000 would be worth $25,382.68 today, all dividends reinvested. This yields a annual rate of return of 7.0%. (Source: FAST Graphs)

Investment Criteria:

So now that we have a basic understanding of who CRR is and what it does, let’s run our basic screening criteria on it, with the help of David Fish’s US Dividend Champions List:

• Pays a dividend: Yes
• Has 5+ years of dividend increases: Yes (14 years)
• Has not frozen dividend for over 8 quarters: Yes
• Has a Chowder number of 12 or more: Yes (15.2)
• Has am EPS payout ratio of less than 70%: Yes (32.92%)
• Pays a dividend monthly or quarterly: Yes (Quarterly; January, April, July, October)

100% of our initial criteria are met. Let’s pull up FAST Graphs and see how CRR fares in round two:

• Has an S&P Quality Ranking of ‘A-‘ or better: Yes (A-)
• Has generally increasing earnings over the past 10 years: Yes
• Is fairly valued/undervalued according to the Normal P/E ratio (blue line): Yes
• Is fairly valued/undervalued according to the Intrinsic P/E ratio (orange line): No

Other Bonus Ratings:

• S&P Capital IQ: Not Rated
  • Scale is 1-5, 1 being ‘strong sell’, 5 being ‘strong buy’
• Thompson Reuters StockReport: 5 (optimized score of 4)
  • Scale is 1-10, 10 being best, 1 being worst
  • Optimized scores weight insider trading and price momentum heavier than other criteria
• Value Line: 3 for safety; 3 for timeliness
  • Scale is 1-5, 1 being best, 5 being worst

Thoughts:

The dividend yield is solid at 2.41%, and is well covered by cash flows. The company had $94.25 million in cash and cash equivalents at the end of 2014, and only paid out $26.35 million in dividends. Another $6.95 million was spent on share repurchases.  With a low payout ratio of 32.93% and a solid cash base, CRR has plenty of room to continue raising its dividend. If the past is any indicator of the future, CRR will do so. The 10 year dividend growth rate is 16.2%, and although the DGR has slowed slightly in recent years, percentage increases are still in the double digits. For the past year, the DGR is a healthy 11.8%. Furthermore, the company has no debt, alleviating one of the major threats to future increases. The company has also split once, a 3-for-2 split in 2005.

The P/E ratio is very reasonable at 13.47, and Morningstar has a one year forward P/E ratio of 13.9, suggesting minimal growth in earnings. However, this could he affected by the massive slide in price over the past 3 months.

CRR’s net profit margin is 13.88%, higher than its sector peers’ average of 10.96%. CRR’s gross margin is very slightly lower than the peer group’s average, at 30.28% vs 30.46%. CRR has higher operating margins, however, at 19.8% for CRR vs 15.55% for its peers. Return on assets and return on equity are also better for CRR, at 10.75% vs 6.75% and 12.07% vs 11.27% respectively. (Source: Scottrade)

For the next five years, it is projected that CRR’s earnings will grow 10.0%, and that the estimated total return will be 16.4%, which is a very solid return. For comparison, SLB’s five year ETR is 16.9%, HAL’s is 38.0%, and NOV’s is 19.4%. This indicates that CRR may actually underperform its peer group slightly. (Source: FAST Graphs)

The biggest weakness I see for CRR is the fundamentals of the industry it operates in. Although the demand for ceramic proppant in fracking is increasing, especially in the Bakken, more competitors are showing up and chipping away at CRR’s profits. These include foreign and domestic companies, which also raises the specter of product dumping by foreign, especially Chinese, companies. On a minor note, sales have also slipped due to some customers’ well construction delays. Conversely, investors must remember that CRR is still the world’s largest supplier of ceramic proppant, is known for quality, and has a solid customer base. Further, CRR has been innovating and developing new product lines, like ultra-high strength proppant (KRYPTOSPHERE) and fracture modeling and simulation software (Fracpro). Although initial results are positive on these innovations, it remains to be seen if they can reverse CRR’s fortunes.

Some good SeekingAlpha articles on CRR can be found here (bearish) and here (bullish).

Final conclusion:

I believe CRR is an attractive investment, according to my criteria. The only criterion that it fails is the Intrinsic P/E check. However, it looks very close to passing that.  The bigger concern I see is that earnings and free cash flow aren’t growing very much. Even worse, they’ve been declining since 2011. Although the company is fundamentally sound and has a decent portion of the ceramics fracking market, the outlook doesn’t look optimistic right now. It’s too early to say if the earnings declines and challenges CRR is experiencing are temporary or permanent. Until that’s clear, I’m not sure CRR is worth investing in right now.

*Note – I will no longer be providing price points. I don’t find them useful, and anyone who’s interested in them a) can look at the chart above, and b) should be doing their own due diligence anyway to see what they’d be willing to pay for a company.

What do you think? Does CRR make the cut for your portfolio? Also, how can I improve future analyses?

Disclosure: Long CVX.

All data is accurate as of market close, 10/21/2014. My stock analysis archive page has been updated accordingly. Please read my disclaimer here before choosing to invest. Company logo image source is available here. Data source is FAST Graphs or company materials, unless otherwise indicated.

Tags: CARBO Ceramics Inc, CRR, dividend-stock-analysis